Netflix Could Go the Way of Blockbuster

by Tom Taulli | April 24, 2012 11:45 am

Netflix (NASDAQ:NFLX) Logo[1]

Netflix’ (NASDAQ:NFLX[2]) innovation and aggressive growth helped to crush Blockbuster Video. Now it looks as though Netflix is on the receiving end of the same competitive assault, except the rivals are much bigger — (NASDAQ:AMZN[3]), Verizon (NYSE:VZ[4]), Dish (NASDAQ:DISH[5]) and Comcast (NASDAQ:CMCSA[6]). So even though Netflix’s stock is cheaper now, investors need to be wary.

Last night, Netflix released its first-quarter earnings report. Revenue came to $870 million, up 21% over the past year. But there was a net loss of $4.6 million, or 8 cents, which compared to a net profit of $60.2 million in the same period in 2011.

The numbers were actually not bad. The problem was the guidance. Netflix says it will get 7 million new U.S. streaming subscribers for 2012, which is about the same as 2010. Oh, and the second quarter is likely to be even worse than 2010 levels. The forecasted range is wide, from 200,000 to 800,000 subscribers — definitely not a sign of confidence.

The intense competition in the U.S. market has been brutal — and it will only get more intense. Besides, Netflix’ competitors have huge resources and can get aggressive on pricing. For example, makes streaming part of its Prime subscription service.

Meanwhile, Netflix has loaded up on obligations to pay for content. In its 10-K, these amounted to $3.9 billion. There are also $1.2 billion in current liabilities (which are generally paid off within a year).

But content outlays will continue to escalate as Netflix’ rivals create a bidding war. In other words, the company must either pay exorbitant fees, which will hurt margins, or have lackluster offerings for its customers. It’s a horrible bind. Netflix recently failed to renew its deal with Starz, which provided access to films from Sony (NYSE:SNE[7]) and Disney (NYSE:DIS[8]).

At the same time, Netflix’ DVD business is coming under pressure from Coinstar’s (NASDAQ:CSTR[9]) Redbox. This segment has been an important source of cash flows to fund Netflix’ streaming business (which has relatively lower margins).

In light of all this, it’s hard to see a happy ending for investors. Netflix is a classic case of a broken growth story. So while the stock may have periodic surges — especially as the fast money comes in — the long term outlook is bleak.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”[10]“All About Short Selling”[11] and “All About Commodities.”[12] Follow him on Twitter at @ttaulli[13] or reach him via email[14]. As of this writing, he did not own a position in any of the aforementioned securities.

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